$1400 Stimulus: The Same, Yet Different

People are excited about the extra $1400 stimulus payments that are coming. Last Saturday, just ONE day after the bill was signed, I heard by the grapevine that some folks already received their payment! More received it this past week, and more will be receiving it in the next several weeks. Even though Americans knew this was coming, and even though it is the third in a series of payments promoting economic recovery from the impact of the pandemic, it does involve some differences worth noting.

  • All dependents qualify. Under the earlier stimulus payments, households received extra payment only for dependents who were eligible for the Child Tax Credit (i.e. under age 17). However, the new round of payments will include dependents who are older children, parents or others. Caveat: it may not be safe to assume that this includes dependents who are not relatives or other atypical dependents – we will need to watch how the law is applied.
    This is the BIGGEST change, and will affect MANY families!
  • The payments are protected from being held back to pay federal debts, such as back student loans, back taxes or back child support. However, as of now, these funds are not protected against private debt collectors after they arrive in your bank account; they could be seized (garnished) for repayment of credit card debt or other private debt.
  • The payments are available to people below certain income limits, just as before, but this time the phaseout is steeper. The phaseouts are as follows: Single Filers and Married Filing Separate phase out from $75,000 – $80,000; Head of Household phases out from $112,500 – $120,000; Married Filing Joint, from $150,000 – $160,000.
  • The steep phaseout means that for some households, the difference in income from one year to the next may be important. The income guidelines may be applied to your income for either of two or three tax years, and if you meet the rule for any of the years, then you will be eligible. For starters, they will check your most recently-filed return, which may be either 2019 or 2020. If you were below the threshold for 2019 but above it for 2020, it may be worthwhile to delay filing your 2020 return until you receive your payment. If your 2020 income is within the limits, then your 2020 return will be used, as long as it is filled within 90 days of the tax-filing deadline of May 17, 2020. And if you didn’t qualify based on 2020, you can still receive the payment as part of your 2021 tax return.
    One key implication: if your income in a normal year would put you above the limits, but you had lower income in 2020, then get your 2020 tax return filed before that deadline of 90 days after May 17!
  • If the payment is made based on your 2019 or 2020 income, and then your 2021 income proves to be above the limit, you will not need to pay anything back.

Source: Kitces.com

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Unemployment Compensation Exclusion – Stay tuned!

When the American Rescue Plan was passed recently, consumers paid most attention to the $1400 stimulus checks (which we’ll discuss in an upcoming post), but there’s another feature that has gotten less attention. If you received unemployment compensation in 2020, it’s good news for you!

The first $10,200 of unemployment income you received in 2020 will now be excluded from your taxable income. This exclusion applies in 2020 only. Exception: you are not eligible for the exclusion if you are a high-income household (over $150,000). In states that follow most provisions of federal tax law, including Iowa, the exclusion also applies to state income tax.

This Unemployment Compensation Exclusion will make a big difference on tax returns for people who qualify, reducing tax bills (and/or increasing refunds) by $1,000 or more for some households. Note: the amount depends on how much unemployment compensation you received and on your total taxable income.

The software we use at Volunteer Income Tax Assistance (VITA) sites was updated very quickly; the update was in place by Friday March 19, only a week after the law was signed. I’m sure the same is true for most other tax software packages.

Some of you may be wondering: what if I filed my tax return earlier in the season??

Do not fear – you are also eligible for the exclusion. However, we do not yet know how that is going to be handled; we need to wait for word from the IRS. For now, the IRS says: “WAIT – don’t take any action until we’ve announced how you should handle it.” The worst-case scenario is simply that you would need to file an amended tax return.  However, some of us are hoping that the IRS and their computers will be able to simply pull out those tax returns, recalculate them, and issue the additional refunds. If that would happen, taxpayers would see two results: 1) an additional refund (check or direct deposit); and 2) a letter explaining the adjustment. Don’t be surprised if the refund arrives before the letter. The same issue arises for state tax returns, and the possibilities are basically the same as well: they may be able to recalculate and issue additional refunds with no action from you, OR you may have to file an amended return. Reminder: for now, the IRS does NOT want anyone to file amended returns for this purpose.

If you are eligible for the Unemployment Compensation Exclusion but filed your taxes before it was enacted, you will need to stay tuned for more information and you may need patience. As always, never ignore a letter from the IRS, and pay attention to your bank statements.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Every Little Bit Counts

I raise bees, then extract and sell their honey. I set my finances up so I can keep that money separate and use it to buy or replace equipment, hoping my hobby would support itself. If I run my apiary as a business, I would need an EIN (Employer Identification Number), and would need to keep good records of all my Income and Expenses. If I run my apiary as a hobby, I will still need to keep good records because I will need to report my income. Personally, I would keep track of my expenses even though they will not help me when filing my tax return. As much as I love bees and their honey, I want to track my expenses to make sure I am not losing too much money with this hobby.

An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. As a business, you will use a Schedule C to report your business activities (income and expenses) and determine what tax should be paid.  You will also be expected to pay self-employment tax quarterly.

As for me and my hobby, I will report my honey sales on a Schedule 1, line 8 of the Form 1040. The income won’t be subject to self-employment tax. On the downside, I may not be able to deduct expenses associated with my apiary.

So, you might be wondering now, “why report the income if I will have to pay taxes on it?” The first reason is that the law requires it. But in addition, there are at least two ways you can benefit from reporting the income.

  • If you have a lower income and are trying to make ends meet by working on the side, any earned income will be used to calculate the Earned Income Credit. Hobby income is not considered “earned income,” but if you report it on Schedule C as business income, then it is considered “earned income.” The earned income credit (EIC) is a tax credit that helps certain U.S. taxpayers with low earned incomes reduce the amount of tax owed on a dollar-for-dollar basis and may result in a refund to the taxpayer if the amount of the credit is greater than the amount of tax owed.  
  • Another benefit of reporting that income as earned income relates to Social Security. Remember that the monthly social security check you will receive in the future is based on current and past work and earnings history. Social Security retirement benefits are based on your average indexed monthly earnings (AIME) over your 35 highest-earning years.  You must have 40 quarters of at least $1410 (2020 rule) of earned income to qualify for Social Security.  Though the income from any job-on-the side is not enough to live on, it may be worth counting toward your 40 quarters and the calculations used to determine your future social security check.
Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Reduced Income in 2020? Check on the EITC

Today is EITC Awareness Day — a great day to remind people about the benefits of the Earned Income Tax Credit. This credit is an “add-on” to your tax refund if you qualify — it is designed to provide a financial boost to working people with low and moderate incomes. This one-minute video gives a great overview!

Even if you’ve never been eligible for the EITC in the past, there’s a chance you might be eligible for it in 2020 if your income was lower, and within the income guidelines. Two figures affect the amount you receive: your total income (Adjusted Gross Income) AND your earned income — income that was payment for work. The maximum income guidelines depend on family size; the highest limit ($56,844) applies to married-filing-jointly households with three or more children. Other eligibility rules apply as well; check out the details and/or use the IRS screening tool.

P.S. Maybe you never guessed the IRS had a YouTube channel! Their videos do a great job explaining lots of tax topics!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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File Your Taxes for Free

Due to COVID, many VITA or AARP volunteer income tax sites are either closed this year or operating at limited capacity, in order to protect the health of all involved. If you have relied on free tax assistance in the past, what can you do now?

IRS Free File is one great answer. It’s an agreement the IRS has made with a number of tax software companies, so that people with incomes below $72,000 can use the software packages to file their federal return (and sometimes their state return) for free. There is no need to be intimidated by the idea of filing your own tax return — these software packages are designed to be very consumer-friendly. If you paid attention last year when your tax preparer reviewed your return with you, and if your situation this year is similar to last year, you are a perfect candidate to do it yourself!

When preparing your own tax return, be sure to:

  • Use a secure internet connection (don’t use public wi-fi at a coffee shop)
  • Read and answer the questions carefully
  • Take your time and double-check the information you enter
  • Remember that you can start one day and not finish – you can come back later when you’ve gathered more information.
  • Save the pdf of your return so you have a copy for next year.

If your tax situation has changed significantly since last year and you are not comfortable preparing your own return, there still are volunteer income tax sites available.  The IRS has a VITA site locator tool to help you find a site near you. NOTE: The site locator tool is not yet active — the IRS plans to have it operational by February 1. Likewise, the AARP Foundation Tax-Aide Locator is expected to come on-line in early February.

If you are eager to get moving now, remember that the IRS will not even begin accepting 2020 tax returns until February 12, due to late December changes in the tax law. We’ll all need to be patient for our tax refunds this year!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Excited for your Tax Refund?

Tax refund season is an exciting time for many families, because the tax refund is often the biggest financial event of the year. If your family is expecting a sizable refund this year, now is a good time to plan for how you will use that money.

Before making specific plans, I encourage you to think about this: the tax refund is a once-a-year event. That means it’s smart to think about the whole year’s worth of possible uses for that money. It’s a good idea because that reminds you to consider whether you’ll want to set aside some of it for things like…

  • Back to school costs
  • Winter coats for next winter
  • 2021 birthdays and holiday expenses
  • Summer day care costs when children are out of school
  • Car repair needs that might arise (or new tires)

If you think through possible expenses for the year ahead, you will be glad you did. It will help you reduce your overall stress load, since you’ll know you have a head start on meeting some of those needs. Of course I understand that if you have past-due bills right now, you’ll probably need to use your tax refund to catch up on those. I also understand that providing something special for yourself and your family right now may be important – whether that be a new piece of furniture or a trip to a restaurant. Only you can sort through all your options and decide on your highest priorities, but your plans will be stronger when you consider the whole year.

Keeping the whole year in mind as you think about your tax refund makes sense, doesn’t it? It’s just like when you get paid weekly or monthly, and you think about the whole week or the whole month before spending. Your tax refund may not be enough to cover all your special needs for the year ahead, but it sure can help.

Important Note: The IRS announced last week that it will not start processing tax returns until February 12. Why? Because the new law passed in the last week of December made several changes, and they need to make sure their computers have those changes programmed in. Result? Chances are your tax refund will be a little slower this year. No refunds will be issued at all until about a week after February 12. Build that delay into your plans.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Side-Hustle or Remotely Employed?

Many Americans have looked at new ways to make a living due to the pandemic undermining some traditional employment options. In a post-pandemic world, many job seekers will look towards the gig economy for answers.

The gig economy has been around for a while. You will have noticed these individuals in your community as self-employed individuals who mow lawns, deliver papers, provide childcare or work temporarily on your farm during harvest.  More recently, though, technology has removed a lot of barriers to high-paying, full-time and part-time remote employment.  Some of these jobs will require a degree while others require only the many skills and knowledge you already possess.

If you are looking into or already committed to earning a living in the gig economy, you will most likely find yourself in the following statistics.

  • 57.3 million people freelance in the U.S. It’s estimated that by 2027 there will be 86.5 million freelancers. (Upwork)
  • 36% of U.S. workers participate in the gig economy through either their primary or secondary jobs. (Gallup)
  • For 44% of gig workers, their work in the gig economy is their primary source of income. (Edison Research)
  • For 53% of gig workers aged 18-34, their work in the gig economy is their primary source of income. (Edison Research)
  • Gig employees are more likely to be young, with 38% of 18-34-year-olds being part of the gig economy. (Edison Research)

If becoming part of the gig economy is in your future, there are a few things to remember:

  • Keep on top of your paperwork
  • Set aside money for taxes
  • Contribute to an IRA
  • Make use of tax deductions.
Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Tax Law worth knowing: EITC “Look Back”

If a mention of tax law causes your eyes to roll back in your head, I ask you to snap out of it for a minute, because this one is important to ordinary households. It’s new (and temporary) — part of the new COVID relief bill enacted this past week, and it will be huge for many workers who have been unemployed or had reduced earnings in 2020.

The Earned Income Credit is a powerful tool for helping working families with lower wages. The amount you receive depends on your earned income. Higher earnings (up to a point) means higher EITC.

2019 EITC Chart: Married Couple with 2 children

Here’s a 2019 example: A married couple with 2 children and with earned income between $14,550 and $22,400, was eligible for an earned income tax credit of $5,828 in 2019. That’s an extra $5,828 added to their tax refund. If their income was below $14,550 then their EITC was lower, but even if they only earned a small amount from work, they would receive some EITC. If their income was higher than $22,400 the amount of EITC gradually dropped, but they would still receive some EITC even if their income was as high as $52,400.

Suppose: a married couple with 2 children earned $25,000 in 2019, and received an EITC of $5,785. However, in March of 2020 they were laid off. They did receive unemployment, but that is not earned income. Their actual earnings from work in 2020 was only $5,000, which made them eligible for EITC of $2,010. That’s a loss of over $3,700, in a year when they were already struggling. The “look-back” provision in the new relief bill allows them to receive EITC (and also the Child Tax Credit) based on their 2019 earned income if it would be more beneficial.

By contrast, imagine a married couple with two children who had earned income of $60,000 in 2019. Their income was too high for EITC in 2019. However due to furloughs, their earned income in 2020 was only $40,000. They will be eligible for EITC in 2020 based on their 2020 earnings (assuming they meet other eligibility rules). When calculating EITC and CTC, taxpayers can choose to use either 2019 or 2020 income figures, depending which is better for them.

Tax law worth knowing!

Source: Kitces.com

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Did you give? Take the deduction!

I love the fact that “Giving Tuesday” has become an annual tradition in the U.S. If you have made gifts to charities anytime during 2020, you may be able to take a tax deduction even if you do not normally itemize deductions!

The CARES Act allows people to deduct up to $300 of charitable giving on their federal tax return without using Schedule A, which is the “itemized deduction” form. That’s great news, because even the lowest standard deduction (federal) is more than $12,000; that means that it’s not worth itemizing deductions if your total deductions would be less than that. Due to the special rule for 2020, taxpayers who gave to charity will be able to deduct their charitable gifts up to $300 while ALSO claiming the appropriate standard deduction. Note: the special CARES Act rule applies only to donations of money; donations of goods, such as clothing or household goods donated to Goodwill or Salvation Army, can only be deducted if you itemize.

What to do? if you made monetary gifts to qualified charitable organizations, gather up your receipts and keep them for tax time. Can’t find the receipt? Cash gifts with no receipt cannot be deducted, since there is no evidence of the gift. But gifts made by check can be deducted even without a receipt, as long as they were bona fide gifts and not payment for something. Here are some examples to explain some common mistakes:

  • Suppose you and your spouse ate at a spaghetti dinner that was sponsored by a local non-profit for free will donation, and you put $20 in the basket. That $20 is NOT a charitable contribution because you received a meal in exchange for the money you gave.
  • Gifts to political or commercial organizations are not tax deductible. The charity should tell you if your gift is tax-deductible, but if in doubt, check the IRS database.
  • If you include $30 in a sympathy card after a person’s death, intending it for the charity of the family’s choice, that is NOT tax-deductible, because you don’t know if it was used for charity. However, if you make out a check to a charity in honor of the deceased individual, that is a deductible contribution.

The Internal Revenue Service is the authoritative source for information on charitable contributions and all income tax topics. Click here for information on this special deduction for 2020.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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EIP Day November 10

If you did not receive your $1200 Economic Impact Payment, it’s still not too late – they delayed the deadline! Next Tuesday, November 10 is designated as EIP Registration Day. Take advantage of this awareness campaign and claim your credit now! NOTE: If you’ve already received your payment, please help us spread the word. If you have ways of reaching people who are homeless, that may be especially important!

The big push at this point is to reach those who do not normally need to file a tax return. The IRS has a special on-line portal just for you folks, where you can enter all the needed information. This video explains how. NOTE: you will need to enter personal information, so be sure you are using a secure internet connection. This will usually take 10-15 minutes.

Iowans who need help with this process are encouraged to contact their local Extension family finance specialist for help. For more information go to the IRS information page on the EIP; to help spread the word via social media, check out the IRS Facebook, Twitter, Instagram, LinkedIn, or YouTube sites.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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